The US headline inflation fell to 7.7% in October, versus 8.0% expected by analysts and from 8.2% printed a month earlier.
It is a fairly nice easing.
And more importantly, core inflation fell more than expected as well, printing 6.3% versus 6.5% expected, and 6.6% of last month. Plus, there are hints that both headline and core figures could further cool down in the coming months, including falling housing prices, used car, and apparel prices.
And cherry on top, even inflation concerning services fell more than expected.
And because soft inflation is the only thing that matters to the Federal Reserve (Fed), and to the Fed expectations, we saw a jaw-dropping repositioning in the markets posterior to the release.
Equities skyrocketed, the US yields and the US dollar tanked on the expectation that the Fed may be content with a lower end rate to call victory in its fight against inflation.
The S&P 500 soared 5.50%, Nasdaq roared 7.50, as Dow Jones rallied 3.70%. The US 2-year yield fell more than 5%, the 10-year yield tanked almost 7% to 3.80%, and the US dollar lost more than 2%.
The US dollar index tanked below its 100-DMA for the very first time since June 2021. The EURUSD rose above the 1.02 level, Cable rallied past the 1.17 level, the dollar-yen tanked to 140, gold rallied past the $1760 per ounce, and even Bitcoin gained 10% in the shaky, jittery crypto world hammered and shattered by the FTX collapse.
A bit overreacting?
Investors reacted to the latest US inflation data as if a miracle happened.
But in reality, US inflation remains very high compared to what the Fed is willing to achieve: the 2% target. Therefore, the Fed will certainly hike by 50bp in December, and will probably hike another two times in the first quarter of next year, by 25bp each, to reach the 5% terminal rate.
So, yes, yesterday was a fantastic day, really, but the markets went clearly well ahead of themselves and we will certainly see some correction and consolidation moving forward.
One thing that investors shouldn’t forget is: companies must operate within a high rate environment, into a global economic slowdown, and the pace of earnings downgrades has only accelerated in the US, recording their longest negative streak since the early days of the pandemic in 2020.
The silver lining is that, the earnings downgrades are already in prices, and morose expectations mean a higher probability of a good surprise.
But, it is still too early to pop the champagne.
Anyway, the US is closed today, but there is a last piece of data, the University of Michigan’s consumer sentiment index, that could temper joy into the weekend, as it is expected to have further eased this month.
But who cares, inflation is what matters the most.
